5 Qs WITH A DEALMAKER
Good morning, Term Sheet readers.
Steve Case, the billionaire co-founder of AOL, wrapped up his sixth Rise of the Rest tour this fall — a nationwide tour to 33 emerging tech hubs between the coasts. “It was time to take this whole effort to the next level,” he told Term Sheet.
Case, who is now the CEO and chairman of investment firm Revolution, teamed up with J.D. Vance, the author of “Hillbilly Elegy,” to form a new seed fund focused on startups located in the so-called flyover states of America. Several weeks ago, Case announced that the fund has raised $150 million from an iconic roster of backers including Amazon CEO Jeff Bezos, Starbucks chairman Howard Schultz, and KKR co-founder Henry Kravis. The New York Times said it “may be the greatest concentration of American wealth and power in one investment fund.”
Term Sheet caught up with Case to discuss the fund, the state of American innovation, and the nation’s obsession with Bitcoin.
TERM SHEET: Why did you decide to create the Rise of the Rest seed fund, and what is your investment thesis?
CASE: The fund came out of our work around Rise of the Rest over the last four years where we’ve visited 33 cities, completed six different tours, and met a lot of entrepreneurs and regional investors. It was time to take this whole effort to the next level. That led us to create the seed fund. We decided to reach out to some of the most respected, iconic individuals in the country. We wanted not just their capital to invest, but also the credibility they could bring that would shine a spotlight on entrepreneurs in the middle of the country who are building great companies.
We’re investing outside of Silicon Valley and New York City and Boston. As you know, the data shows that 75% of venture capital went to three states — California, New York, and Massachusetts — so we’re trying to invest in other places. We won’t lead rounds and we won’t take board seats. We want to be a catalyst investor, so our $150 million ends up being over a billion dollars as it gets invested in these companies. And some of the LPs in this fund are interested in making direct follow-on investments, so they’re looking to us to not just generate good returns from the fund but also interesting deal flow that might be of interest to them down the road.
The fund’s backers are a Who’s Who of American business. How did you get those entrepreneurs and investors on board?
CASE: I knew virtually all of them from things we’ve done over the years. As the visibility of Rise of the Rest grew, some people called and said they were interested in what we were doing and would like to co-invest. Rather than doing it in a deal-by-deal or city-by-city kind of way, we decided to create this fund.
In general, there were three motivations that led to people committing. One was they believed in the investment thesis that there were great entrepreneurs building great companies everywhere, and they recognized that the valuations of the companies in these Rise of the Rest cities tended to be lower. The second was about deal flow — a number were interested in investing in these cities but didn’t have the networks. The third was that people generally resonated with the idea that this would have impact and would drive more startup creation, and therefore job creation, in more places.
You went on your sixth Rise of the Rest tour this fall. What are some hubs of innovation investors should be paying attention to?
CASE: They should be paying attention to the rest of the country. It’s crazy that so much capital goes to so few entrepreneurs in so few places. A lot of investors, frankly, have blinders on. There are still investors who believe all the great entrepreneurs are in Silicon Valley and that all breakthrough companies are going to be based there. The reality is that’s not true.
In the first wave of the Internet, it was regionally distributed. Microsoft started in Albuquerque, N.M., IBM was in Boca Raton, Fla., Dell was in Austin, Texas. It’s only in the second wave of the Internet where it was mostly about software, and that’s when Silicon Valley rose to prominence and then dominance. But in the third wave — which is about disrupting important aspects of our lives like healthcare, farming, and education — the domain expertise will be important again. Being close to partners will be critical. And that’s what we’re seeing across the country. We’re seeing health tech innovation in cities like Baltimore because of Johns Hopkins University and Cleveland because of the Cleveland Clinic. In terms of ag-tech, there are interesting things happening in St. Louis, Mo., in Lincoln, Nebraska, and in Louisville, Ky.
My main message to investors is to start getting on planes and visiting these entrepreneurs, not just getting in their cars or getting on their bikes to drive to the founders nearby.
Cryptocurrencies, blockchain technology, and initial coin offerings are rising in popularity within the tech community. Are you seeing this in Middle America?
CASE: We are. One of the companies that won our pitch competition last month was a company using blockchain for real estate around titles called SafeChain.
Our view is that blockchain is a core fundamental technology that will end up having a profound impact on many industries, not just the financial service industry. The boom and mania around Bitcoin in recent months reminds me a little of the Dot Com boom and mania 20 years ago. I think there will be some winners and losers and we’ll need to separate the core technologies from some of the current implementations. We need to be a little more cautious around things like ICOs — some of them will work out but many of them won’t. It’s not surprising to me that the SEC has started to look harder at them because using some of these new technologies to raise capital in a less regulated way with fewer consumer protections is not sustainable.
Having been through the Dot Com bubble, what advice would you give to entrepreneurs raising capital through ICOs and to the people participating in them?
CASE: At the core, it’s about focusing on building durable, sustainable businesses and not being as focused on the capital-raising side. Sometimes the focus is too much on raising capital and announcing some big round, but ultimately, it’s about building a durable business.
Twenty years ago, there were many companies that went public with little in the way of revenue and generally no profits. Some of them ended up moving on to be great successes, but many fell by the wayside. You have to be enthusiastic by the possibilities, but with eyes wide open about the risks. It should be about investing in great entrepreneurs building great companies and less around speculating on cryptocurrencies and certain financial instruments.
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• Respicardia, Inc, a Minnesota-based medical technology company, raised $58.5 million in funding. ZOLL Medical Corporation led the round.
• ACL, a Canada-based SaaS provider helping governments and companies quantify risk, raised $50 million in funding. Norwest led the round.
• Passport, a Dover, Delaware-based mobile payments company specializing in the transportation industry, raised $43 million in Series C funding. Bain Capital Ventures led the round, and was joined by investors including Grotech Ventures, MK Capital and Relevance Capital.
• Common, a New York-based co-living startup, raised $40 million in Series C funding. Norwest Venture Partners led the round.
• Convercent, a Denver-based ethics and compliance cloud software provider, raised $25 million in Series E funding. Rho Ventures led the round.
• SendBird, a provider of a messaging and chat API for mobile apps, raised $16 million in funding, according to TechCrunch. Shasta Ventures and August Capital led the round, and was joined by investors including Y Combinator and Funders’ Club. Read more.
• Anodot, an Israel-based AI-powered analytics company, raised $15 million in Series B funding. Redline Capital Management led the round, and was joined by investors including investors Aleph Venture Capital and Disruptive Technologies Venture Capital.
• Ample Hills Creamery, a Brooklyn, N.Y.-based maker of ice cream, raised $8 million in Series A funding. Rosecliff Ventures led the round and was joined by Bullish, Lerer Hippeau, RiverPark Ventures, The Allana Group, and Charles Cohen of Cohen Media.
• Happy Returns, a technology, logistics and service provider for online retailers, raised $8 million in Series B funding. USVP led the round, and was joined by investors including Upfront Ventures and Trunk Club founder Brian Spaly.
• Fiit, a U.K.-based social workout app, raised 2.4 million pounds ($3.2 million) in seed funding. Connect Ventures led the round, and was joined by investors including JamJar Investors, Rooks Nest Ventures and Westminster Capital.
• Ataata, a Bethesda, Md.-based cyber security training platform, raised $3 million in funding. Next Frontier Capital led the round, and was joined by investors including TEDCO, 2M, SaaS Ventures and ARRA Capital.
• Radar Relay, a Fort Collins, Colo.-based decentralized crypto currency exchange, raised $3 million in seed funding. Blockchain Capital led the round, and was joined by investors including SV Angel, Digital Currency Group, Reciprocal Ventures, Collaborative Fund, Kindred Ventures, Kokopelli Capital, Notation Capital, Sparkland Capital, and V1.VC.
• Ocean Protocol, a decentralized data exchange protocol, raised funding of an undisclosed amount from Outlier Ventures.
HEALTH AND LIFE SCIENCES DEALS
• Nuritas, a biotechnology company focused on the discovery and use of bioactive peptides through artificial intelligence and genomics, raised $20 million in Series A funding. Cultivian Sandbox Ventures led the round.
• BIOHM Health, a microbiome company, raised funding of an undisclosed amount from Vanterra Capital.
PRIVATE EQUITY DEALS
• TA Associates made an investment in in Flexera, an Itasca, Ill.-based software developer. TA said it is buying equity from existing investors and is working with lead investor Ontario Teachers’ Pension Plan to continue to grow the company. Financial terms weren’t disclosed.
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• Atlantic Street Capital acquired a majority stake in Lori’s Gifts, a multi-unit retailer of gift shops in hospitals.
• Magnitude Software will acquire Innowera, a Dallas-based provider of SAP data management solutions. Financial terms weren’t disclosed.
• Delta Health Technologies, an Altoona, Penn.-based software provider for home health, hospice and private duty agencies, was acquired by Salo Solutions, Inc. Financial terms weren’t disclosed.
• A consortium led by French billionaire Xavier Niel agreed to buy a majority stake in telecommunications company Eir. Niel’s NJJ Telecom Europe and French telecommunications company Iliad did not disclose what they paid for the stakes, but said the deal put Eir’s enterprise value at around €3.5 billion ($4.1 billion). Eir is currently owned by investors including Anchorage Capital Group, LLC Davidson Kempner Capital Management, and GIC. Read more.
• Centre Partners sold Captain D’s, a Nashville-based operator of seafood restaurants to Sentinel Partners. Financial terms weren’t disclosed.
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FIRMS + FUNDS
• Olympus Partners, a Stamford, Conn.-based private equity and venture capital firm, raised $3.04 billion for its seventh fund, Olympus Growth Fund VII.
• Flagship Pioneering, a Cambridge, Mass.-based venture capital and private equity firm, raised $618 million.
• Pelican Energy Partners promoted John O’Brien to managing director.